Nearly There the Company an SEC registrant, designs, develops, manufactures, and

sells various navigation products and services. Because of significant research and

development expenses and slumping sales results in recent periods, the Company is in

need of additional capital to continue product development and to meet projected

operating budgets for the coming year.

In November X the Company issued million shares of Series B preferred stock at

$ per share the Original Issue Price to new investors the Series B Preferred

Stock Total proceeds, net of issuance costs, received by the Company from this

issuance were approximately $ million. The significant terms of the Series B Preferred

Stock are as follows:

The par value of the Series B Preferred Stock is $ per share.

Dividends In each calendar year, the holders of the thenoutstanding Series B

Preferred Stock are entitled to receive, when, as and if declared by the Companys

board of directors, cumulative dividends at the annual dividend rate of percent of

the Original Issue Price, as appropriately adjusted for any stock dividends,

combinations, reclassifications, recapitalizations, or splits with respect to such

shares.

Voting rights Holders of the Series B Preferred Stock have protective voting

rights to vote together with the common stockholders on an asconverted basis on

certain significant events eg change in control, major asset sales, extraordinary

distributions

Conversion option At the holders option and at any time after the date of

issuance, each share of the Series B Preferred Stock can be converted into the

Companys common stock. The initial conversion price is $ which is subject

to certain adjustments including:

o Stock dividends and combinations or subdivisions of common stock.

o Reclassification and reorganization.

o Adjustments for additional issuance of the Companys equity securities

Conversion price adjustment The conversion price will adjust downward if any

equity security is issued by the Company for an amount per share that is less than

the thenexisting conversion price of the Series B Preferred Stock, thus providing

downround protection to the holders of the preferred stock.

Optional redemption feature After the third anniversary of the original issue

date of the Series B Preferred Stock and upon the vote or written consent of at least

a majority of the thenoutstanding shares of Series B Preferred Stock, holders can

Case c: Nearly There Page

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redeem the outstanding shares of the Series B Preferred Stock for cash. The

redemption value is the Original Issue Price plus all declared but unpaid dividends.

Mandatory redemption feature After the sixth anniversary of the original date of

the Series B Preferred Stock, the outstanding shares of the Series B Preferred

Stock must be redeemed for cash. The redemption value is the Original Issue Price

plus all declared but unpaid dividends.

Upon evaluation of the Series B Preferred Stock, the Company considered the economic

payoff profile of the potential embedded features and concluded that the following

separate units of account require further evaluation: the conversion option and the

redemption option includes both the optional redemption feature and mandatory

redemption feature

Additional facts:

The conversion option was set at the money at issuance.

The Company is well capitalized. The market capitalization of its common stock is

$ million.

The Companys common stock is publicly traded and the number of shares to be

exchanged in the event that the Series B Preferred Stock is converted is small

relative to the daily transaction volume of the Companys common stock.

The Series B Preferred Stock is not remeasured at fair value. Accordingly, there are

no changes to earnings related to Series B Preferred Stock after the issuance.

The embedded features are deemed not to meet any scope exceptions in ASC

Required:

Is the host contract more akin to a debt or equity instrument for the purpose of

analyzing the embedded features in the Series B Preferred Stock?

Should the Company separate the conversion option in the Series B Preferred

Stock from the host contract and account for it as a derivative instrument?

Should the Company separate the redemption option in the Series B Preferred

Stock from the host contract and account for it as a derivative instrument?

Would your answer to Question change if the Company was a private company

and its common stock was not publicly traded?